What are the top challenges facing the buy- and sell-side when it comes to technology?
One of the underlying challenges is an over reliance on legacy technology and inadequate IT infrastructure. The shortening of settlement cycles across markets and asset classes, combined with increasing trade volatility, is creating new pressures on manual operational processes for both buy- and sell-side participants across multiple trade lifecycle functions. This includes clearing, settlements, trade execution, margins, and fails processing.
Simply put, with T+1 there is less time for dated, manual processes to be completed. These pressures are only going to increase as volumes globally continue to expand, and with further market structure and regulatory change, including same-day and block-level clearing, tokenised atomic settlement, and bilateral settlement, to name a few. The answer has to be innovation and digitalisation of market infrastructure. To prepare, firms must look beyond tactical changes and so-called ‘throwing bodies at it’ and start investing in evolutionary transformation.
How well are legacy systems and artificial intelligence working together currently?
We’re seeing a fairly even split when it comes to clients who are looking to launch entirely new solutions versus those who want to integrate new technologies into their existing set up.
This is a real dilemma! Legacy systems are proven, however, they are often siloed and monolithic. It feels easier to build certain types of AI into legacy systems rather than ground a newly architected, ground up build, however challenges that often crop up include compatibility issues with outdated IT architecture and having to work with fragmented or incomplete data sets. Furthermore, ground up design, architecture, engineering, testing, and launch is very expensive and takes a lot of time, even with today’s agile environments.
The answer can be buying or building an integration services layer that protects the proven legacy systems and allows you to leverage new age technologies and cloud environments to create interoperability for the future.
Fortunately, Generative AI is a new age technology that can do both, be integrated easily with proprietary systems, modern builds, and even third-party applications – providing almost instant benefits. AI can be built into co-pilots and used to unify multiple different user interfaces. We’re certainly seeing a lot of interest for this type of product in the post-trade space, for example to help drive productivity, increase scalability, and enhance risk management such as is required in a T+1 environment.
In what ways is AI set to be most useful for traders?
AI has the potential to transform all stages of the trade lifecycle. For example, it can be used to analyse historical data and predict which trades are most likely to fail. This knowledge can be shared with the front-office to factor the costs of potential trade failures into their own decision-making, and it can also help back-office teams to avoid fails by focusing their attention and resources on trades most at risk of failure.
AI is also saving traders time on research tasks that can be better spent elsewhere. For example, at Broadridge we built BondGPT, a large language model (LLM) chat function that allows users to ask questions and instantly identify corporate bonds on the platform based on their criteria. By leveraging generative AI and incorporating real-time liquidity information, this application has created significant efficiencies in the bond selection and portfolio construction process – something that used to be incredibly complex and take up a huge amount of traders’ time.
What will be the biggest trend over the next 12 months when it comes to digital transformation?
I wish the answer was modernisation and innovation, but it is clearly resiliency and security. Of course, modernisation and innovation will play into solving those critical agendas. With cyber threats and incidents becoming increasingly sophisticated, we’re seeing a heightened regulatory focus on cybersecurity and operational resilience across the financial services sector. In fact, our latest study on digital transformation reveals that over the next two years, financial firms will boost their investments in cybersecurity by 28%.
In Europe, firms are preparing for the EU’s Digital Operational Resilience Act (DORA) which comes into force in January 2025. While this is currently the most comprehensive regulation of its kind, the thinking is reflected by other jurisdictions around the world, including Japan, Australia and the US. These regulations are complex but essential. By improving long-term operational resilience, firms can better protect themselves from the financial and reputational impact of cyber incidents and other disruptions, and at the same time, they will instil confidence in their customers by demonstrating their ongoing commitment to safeguarding their digital assets and services.